SINGAPORE (Mar 20): Phillip Securities is cutting the target price of Singapore Exchange on lower FY19 forecast earnings as derivatives growth slows the most in almost two years.
For the months of January and February, SGX saw derivatives daily average volume (DDAV) growth contract to 2.4% y-o-y and 1.4% y-o-y respectively compared to a 24.1% y-o-y jump in 2Q19 ended Dec 2018.
The contraction in derivatives volume was due to lower hedging activities at the start of 2019 as global markets recovered. This was in stark contrast to the extremely volatile conditions in 2018.
“Hence, we cut our forecast for FY19E derivatives revenue growth from 27.4% y-o-y to 22.1% y-o-y. Meanwhile, SDAV showed no signs of recovery and contracted 38.6% y-o-y in February,” says Phillip analyst Tin Min Ying in a Tuesday report.
Phillip is downgrading SGX to “accumulate” with a lower target price of $8.17.
On Mar 11, the Hong Kong Stock Exchange (HKEX) announced plans to launch futures contracts on the MSCI China A Index. This will allow investors to hedge their A-share equity exposures. Currently, SGX’s FTSE China A50 Index Futures is the only offshore futures contract tracking the Chinese A-share market.
In 6M19, SGX’s derivatives business contributed to 50% of total revenue with the main driver FTSE China A50 Index Futures accounting for 43% of total trading volume ytd.
HKEX's launch could put SGX in a vulnerable position, says Tin.
“If HKEX succeeds in its plans to introduce MSCI China A Index futures, SGX could face some competition as some customers will make the switch to HKEX and derivatives revenue might be dampened in the long term.”
SGX’s China A50 Index futures currently contributes about 13% of total revenue. Assuming SGX loses 50% of its China A50 revenue, the impact to PATMI is around 8%.
However, Tin does not expect HKEX’s plans to have a significant impact on SGX’s derivatives revenue for the FY19-20.
Firstly, if HKEX obtains relevant approvals, the launch should only be ready in November 2019. Secondly, HKEX will take months to build up liquidity and onboarding of clients’ systems.
Thirdly and more importantly, SGX’s derivatives platform provides high customer retention due to its deep liquidity as a first mover. SGX allows customers to carry out margin offsets across their various derivatives assets and hedge currency exposures with its diverse FX exchange, especially via USD-CNH and INR-USD FX futures.
As at 4.14pm, shares in SGX is down 3 cents at $7.32 or 19.6 times FY20E earnings.
